IMF slams growing inequality in Israel

In its annual report on Israel, the IMF says unless unemployment is tackled in the haredi and Arab sectors, growth will slow sharply.

Even as the IMF praises Israel's economy and believes that the real estate market is headed for a soft landing, it calls on the government to take immediate measures to integrate haredi (ultra-orthodox) men and Arab women in the labor market, or else, it predicts, economic growth will slow sharply in the medium term.

The IMF Article IV Consultation Staff Report for 2012 recommends that that the government set a target of 75.6% participation in the labor force by haredi men and Arab women aged 20-64, and a general target of 60% participation by these communities. It notes that Israel's participation in the labor force is very low at 56-58% - among the lowest of OECD states.

The IMF states, "Participation rates among the Arab-Israeli and haredi groups need to rise to tackle poverty and maintain the medium-term growth potential of the economy. This requires further reform of incentives and labor market institutions." It adds, "Inequality and poverty - both already high - are set to rise further reflecting low participation and rapid growth of the Arab-Israeli and haredi communities… If continued, participation and demographic trends in minority communities will soon significantly lower the potential growth of the economy, with implications for overall income growth, inequality, and fiscal sustainability." It notes that the participation rate for haredi men in the US and UK are on par with the general population.

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The IMF concludes, "Haredi and Arab participation problem has already caused poverty. If not addressed, this will also cause growth to slow sharply in the medium term. In both cases, low employment rates appear to reflect high marginal tax facing these communities, and high reservation wage. Furthermore, both contributed to lowering human capital acquisition. Solutions should address all these problems quickly, because growth and fiscal implications are urgent."

The IMF predicts 2.8% GDP growth for Israel in 2012 and 3.8% growth in 2013. It notes the soundness of Israel's economy during the global economic crisis of recent years, but is highly critical of the government with regard to social gaps and the labor market.

"The quality of infrastructure in Israel is below the OECD average. Israel scored highly among telecommunication indicators, but relatively poorly on physical infrastructure. Poor transport infrastructure is one of the obstacles to regional Arab communities’ participation in the labor market.

"If these poor outcomes for minority groups are not resolved, Israel will face a considerable crunch in public spending. The minority groups are rapidly becoming an increasing share of the population. If employment and productivity rates are not lifted, Israel’s potential GDP will be affected, with severe flow through impacts on the amount of civilian expenditure."

On the matter of social inequality, the IMF says, "Social protection outcomes in Israel leave room for improvement. Israel has one of the highest levels of inequality in the OECD. Israel’s relatively high degree of market income inequality reflects the impact of the two low income groups: the ultra-orthodox men (haredi) and Arab women, who make up considerable shares of the population but have very low levels of labor force participation. This is reflected in very low market incomes of the lowest income decile which are 1/15th that of the highest income decile. While the size of redistribution from the tax transfer system (the difference between market and disposable incomes) is around average in Israel, the high starting point leaves Israel one of the most unequal countries in the OECD, after only the US, Mexico and Chile."

The IMF warns that the real estate bubble still jeopardizes stability of the banks, although the government has taken measures to reduce the danger. The IMF also now predicts a soft landing for the real estate market, rather than the hard landing it warned about in its previous report on Israel.

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